Budget 2018 on Agriculture: Can new MSP prop up rural economy?

New Delhi: Following consecutive years of low crop prices which led to farmer protests in several states, finance minister Arun Jaitley on Thursday announced that the government will fix minimum support prices (MSP) at 50% over costs—ceding to a major demand of farmer organizations.

“I am confident that this historic decision will prove an important step towards doubling the income of our farmers,” Jaitley said in his budget speech.

Going a step ahead the finance minister also said that the government will ensure that farmers reap the benefits of higher MSP, either via direct procurement of crops or by paying them the difference between MSP and market prices. The budget directed government think tank NITI Aayog “to put in place a foolproof mechanism so that farmers get an adequate price for their produce”.

To help farmers receive better prices for their harvest, the budget also promised to create an “institutional mechanism” which will forecast future prices and demand, develop policies for use of futures and options, expand use of warehouse depository systems and take decisions relating to exports and imports.

Overall, budgetary allocation for the agriculture ministry went up by about 15%, from Rs50,264 crore in 2017-18 (revised estimates or RE) to Rs57,600 crore in 2018-19 (budget estimates or BE). Among major schemes, outlays on crop insurance were raised from Rs10,698 crore (2017-18 RE) to Rs13,000 crore (2018-19 BE), while those on micro irrigation were raised from Rs3,000 crore to Rs4,000 crore. However, funding for the price stabilization mechanism used to procure pulses (under the food ministry) was slashed from Rs3,500 crore to Rs1,500 crore.

“The government has finally realised the need to rejuvenate the agriculture sector and address farmers’ concerns but it is yet to figure out a method to ensure remunerative prices,” said Siraj Hussain, former agriculture secretary and currently a fellow at Delhi-based Indian Council for Research in International Economic Relations.

“By saying that MSP will be fixed at 50% over costs, the government is misleading farmers as they are unlikely to use comprehensive or C2 costs as the benchmark for calculating returns... the responsibility on NITI Aayog means yet another government committee will be set up and farmers will have to keep waiting,” Hussain added.

It is not clear from the budget documents which measure of cost the government will take while announcing MSPs in future. Farmer organizations have demanded MSPs at 50% over C2 or comprehensive cost of production which includes imputed rent and interest on owned land and capital. This is higher than the A2+FL measure which includes paid out costs on inputs plus an imputed value of family labour.

In his budget speech the finance minister said that in the ongoing rabi (winter) crop season, MSPs were fixed at 50% of costs for most crops. However, a comparison of A2+FL and C2 costs with announced MSPs show that for major winter crops like wheat, mustard and chana, net returns to farmers were lower than 50% when C2 costs are used, while returns were significantly higher than 50%—from 79% to 112%—when A2+FL costs are used.

In other measures, the finance minister announced the creation of a Rs2,000 crore agri-market infrastructure fund to connect 22,000 rural markets to the electronic national agriculture market (eNAM) platform. Jaitley also announced plans to develop a cluster-based model of horticulture to assist groups of farmers all the way from production to marketing.

To address production and price fluctuations in onion, potatoes and tomatoes—the most widely consumed vegetables—the budget announced a new programme, Operation Greens, (Rs 500 crore) that he said would be similar to Operation Flood for promoting dairy.

To give a boost to fisheries and animal husbandry, the finance minister announced a Rs10,000 crore fund under apex rural bank NABARD. The budget also set a target of disbursing Rs11 trillion toward agriculture credit in 2018-19, a 10% rise over the previous year’s target.

To help Indian farmers benefit from higher exports, the budget promised to liberalize farm export policies and help set up state-of-the-art testing facilities in mega food parks.

The budget announcements for the farm sector come against the backdrop of a protracted period of rural distress, due to consecutive years of drought in 2014 and 2015, followed by a collapse in farm gate prices in 2016 and 2017. India’s agriculture growth rate between 2014-15 and 2017-18 averaged less than 2% a year, leading to near stagnant farm incomes. Since last year, farmer protests began in several states with demands for remunerative prices and debt waivers.

Overall, for the rural sector, Jaitley also outlined a slew of measures to boost the rural economy, announcing new projects as well as enhanced support for existing schemes.

“The focus of the government next year will be to provide maximum livelihood opportunities in rural areas by spending more on livelihood, agricultural and allied activities and construction of rural infrastructure,” Jaitely said. “In the year 2018-19, for the creation of livelihood and infrastructure in rural areas, the total amount to be spent by ministries will be Rs14.34 lakh crore from extra-budgetary and non-budgetary resources,” he said.

Though he did not refer to schemes like the flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the budget fine print shows that the government has allocated Rs55,000 crore for it—an increase of Rs7,000 crore over the allocation in 2017-18 (BE).

The rural roads programme—Pradhan Mantri Gram Sadak Yojna—was allocated Rs19,000 crore in 2018-19—the same as last year. The rural housing programme—Pradhan Mantri Awaas Yojna—saw a dip in funding at Rs21,000 crore in 2018-19 compared to Rs23,000 crore in 2017-18. The allocation for the National Rural Livelihood Mission was raised, from Rs4,500 crore in 2017-18 to Rs5,750 crore in 2018-19. Loans to women’s self-help groups were expected to increase from about Rs42,500 crore in 2016-17 to Rs75,000 crore by March 2019, the finance minister said.